Kolkata: A personal loan, like any other loan, comes with a repayment schedule. One has to complete repayment of the EMIs (equated monthly instalments) within the schedule set by the lender. But it must be kept in mind that if the borrower wants, he/she can repay the loan before the prescribed tenure.
Any lender is extremely cautious about a personal loan since it is an unsecured loan — one which is given without keeping any asset as collateral. Prepayment of a any loan is an indicator of the financial solvency of the borrower. However, there are a few points any borrower should be cautious of. Borrowers need to carefully weigh all options before opting for foreclosure.
Foreclosure and advantages
Foreclosing or prepayment of a loan is a good option for a borrower who has surplus funds at his hand. Settling a debt early comes with the advantage that one has to pay less total interest than he/she would have to pay otherwise during the normal course. Prepayment also can have a positive impact on one’s credit score. Also, if one can close a loan before schedule, one become financially free to apply for another loan, if any sudden need arises. But saving on interest cost is one of most compelling reason to pay off, if possible, before the scheduled date. Also if you can pay off a loan completely, you actually end up freeing up the amount of money every month that you would have paid as EMI. You can even think of investing that amount to some productive asset or activities.
Points to take care of
In order to discourage prepayment of loans, lenders impose foreclosure charges. It can vary approximately between 2% and 6% of the outstanding loan amount. These charges are meant to partially compensate the lender for the reduction in interest income that the foreclosure results in. Also, there is the question of opportunity cost. The borrower can use the lumpsum, he/she uses to foreclose the loan to invest in other income generating asset such as stocks, mutual funds etc. It is possible that such investments earn him/her higher returns than the rate of interest the borrower is paying on the loan. Also paying off a handsome amount can cause temporary liquidity problems for an individual, especially if some unforeseen situation crops up.
Will foreclosure charges be abolished?
However, the foreclosure charge could be on its way out. RBI has issued guidelines for discontinuing the practice of prepayment charges on floating-rate loans. Once implemented, it could remove a major irritant for the borrower and pave the way for a smoother foreclosure of loans. However, the possible liquidity crunch and opportunity cost question will remain.
Any loan comes with a repayment schedule. Foreclosing a loan mean repaying it entirely before the repayment tenure and can have a few positives for the borrower. But one has to weigh options. Read on. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
